test

Which of the following statements regarding Treasury bills are true? They are sold in minimum denominations of $10,000. They are offered with maturities ranging up to 52 weeks. Their interest is exempt from taxation at the state level. They are callable by the U.S. Treasury at any time before maturity.

2 & 3, Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from four weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.

One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? A) 24 B) 19 C) 55 D) 20

20 Explanation Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.

The OCC must receive exercise instructions for equity options no later than

5:30 pm ET on the third Friday of the expiration month. Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day.

A toll road authority issues a revenue bond backed by the revenue stream from the tolls collected. In addition, the state agreed to cover any shortfall. This bond is categorized as A) a double-barreled bond. B) an overlapping debt issue. C) an industrial revenue bond. D) a moral obligation bond.

A A bond secured by both a defined source of revenue (other than property taxes) and the full faith and credit of an issuer that has taxing powers, such as the state, is known as a double-barreled bond.

Customer account statements must include the per-share estimated value of a direct participation program (DPP) or unlisted real estate investment trust (REIT) security held in the account. Which of the following does FINRA accept as an estimated value methodology? A) Net investment B) Gross investment C) Market value D) Tax basis

A Net investment For these securities, where a ready market does not exist, the estimated value must be based on one of two valuation methods. One of those is net, not gross investment. The more common method is an independent appraisal. Tax basis is irrelevant to the current value.

A direct participation program (DPP), organized as a limited partnership, must avoid at least two characteristics of a corporation. Which two characteristics are the easiest to avoid? Continuity of life and freely transferable interests

Continuity of life and freely transferable interests are the easiest to avoid. The limited partnership is formed to exist for a limited time, and general partner (GP) must approve any transfer of interests. Centralized management is the hardest characteristics to avoid because management of the program is the responsibility of the general partner (GP), so management is centralized.

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) an after-tax basis, and those contributions are not deductible on his tax return.

Contributions to an ESPP are payroll deductions. Though the contribution percentage is calculated on one's pretax salary, they are taken after tax. Contributions to ESPPs are not deductible on one's tax return.

All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true except A) GNMAs are considered to be the riskiest of the agency issues. B) investors receive a monthly check representing both interest and a return of principal. C) investors own an undivided interest in a pool of mortgages. D) the minimum initial investment is $1,000.

GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues. As is the case with most agencies, the minimum denomination is $1,000.

Rule 147 offerings may not be sold to an out-of-state investor for ____ months following the last sale of a new issue.

Holders of shares issued under Rule 147, the intrastate offering exemption, cannot resell their shares to nonresidents of the state for a period of six months from the date of purchase. Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located. Stock sold under Rule 147 is sold in an exempt transaction. Rule 147 applies to intrastate stock offerings.

A disclosure reporting page (DRP) must be completed on a person's Form U4 for all the following reasons except A) a period of homelessness. B) a bankruptcy. C) a civil suit resulting from an inheritance dispute. D) a tax lien.

Homelessness is something that would be disclosed on a Form U4, but it is not subject to the additional scrutiny of a DRP. Bankruptcy, civil suits, and tax liens must all be disclosed on a DRP for additional review.

An investor buys a municipal bond at a discount. The bond carries a 3% coupon. At maturity, the bond will pay the face amount to the holder of the bond on the maturity date. In the meantime, the IRS requires accretion of the discount. That accretion is tax-exempt income when the bond is A) a bond purchased in the secondary market at a discount. B) a bond issued at par, but purchased in the secondary market at a discount. C) a general obligation bond. D) an original issue discount bond.

If the discount is an original issue discount (OID), the annual accretion is not taxable. An OID means that the bond's issuance price in the primary market was below par (a discount). As an OID, the annual accretion is considered part of the interest being paid by the issuer and that is why it is tax exempt. However, if the discounted transaction were in the secondary market, then the annual accretion would be taxable as interest income. That does not affect the tax-exempt status of the coupon interest paid. It is highly unlikely that your exam will ask about the tax treatment of the accretion when a secondary market purchase of an OID municipal bond occurs at a price above or below its accreted value. The exam could ask about capital gain or loss, but we do not expect a question about figuring the tax on the accretion in this unusual case.

Which of the following strategies is intended to be profitable with either a significant upside or significant downside move in the underlying stock? A) Horizontal spread B) Long straddle C) Short straddle D) Vertical spread

If the stock moves sharply up or down, the customer will profit from owning a long straddle.

Under FINRA rules, members are prohibited from soliciting votes from limited partners in connection with a proposed rollup unless any compensation to be received by the member A) does not exceed 2% of the value of the securities to be received in the exchange.

In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% or less. The 10% limitation is the maximum compensation in the sale of a DPP. The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses. The 5% is likely an attempt to make you think about the FINRA 5% markup policy. That does not apply to DPPs.

Listed options on U.S. exchanges are available on all of the following currencies except A) the Canadian dollar. B) the Euro. C) the U.S. dollar. D) the Japanese yen.

In the U.S., exchange-listed currency option contracts exist on foreign currencies, not on the U.S. dollar. With U.S. exchange-listed currency option contracts, the U.S. dollar is the base currency to which movements in the foreign currency is compared

The interest from which of the following bonds might be included in the alternative minimum tax calculation? A) Tax anticipation notes B) Industrial development revenue bonds C) General obligation bonds D) Special assessment bonds

Industrial revenue bonds, sometimes called industrial development bonds, may be nonpublic purpose bonds, and the proceeds are used to benefit private corporations. As such, the interest income from these bonds is a tax preference item in the alternative minimum tax calculation. AMT BOND -private activity bond that qualifies for tax-exempt status but is subject to paying the alternative minimum tax. Also known as a qualified private activity bond.

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket?

Partial or random liquidations of a variable annuity are taxed on a last-in, first-out (LIFO) basis, which means that the last dollars into the account, the earnings, are withdrawn first. Of the $30,000 withdrawn, $20,000 represents deferred earnings or income that is now taxable at the 28% rate (0.28 × $20,000 = $5,600). No penalty applies because the investor is older than age 59½.

What additional documentation is sent to the customer upon account opening?

Privacy Statement SIPC Coverage (annually) Brochure

Regarding Regulation D (private placement) offerings, which of the following statements is true? A) The amount of capital that can be raised through a private placement is limited. B) Purchasers need not be provided or have access to offering information normally provided by a prospectus. C) Registration with the SEC is not required. D) The SEC does not require issuers to file.

Registration with the SEC is not required.; Regulation D offerings are exempt transactions, and therefore, no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue within 15 days of the first sale of pp securities. This filing will contain all of the information a potential investor might want to know—similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised through a Regulation D private placement transaction.

FINRA's suitability rule involve several different forms of analysis. The rule does not include A) reasonable-basis suitability analysis. C) quantitative suitability analysis. D) customer-specific suitability analysis.

The FINRA suitability rule, 2111, provides for three different measurements of suitability. Those are customer-specific, reasonable-basis, and quantitative suitability analysis. The rule says nothing about qualitative suitability. A reasonable-basis suitability analysis is necessary to ensure that an investment is suitable for some investors as opposed to a customer-specific suitability analysis, which is undertaken on a customer-by-customer basis. Quantitative suitability analyzes the volume of transactions to determine if activity is not excessive based on the customer's profile.

A broker-dealer needing up-to-the-minute pricing information on eligible municipal bonds would find it on A) TRACE. B) ADF. C) OATS. D) RTRS.

The MSRB's Real-Time Reporting System (RTRS) requires municipal securities dealers to report information about most trades in municipal securities within 15 minutes. Before it was replaced in 2021, OATS reported on Nasdaq equities. ADF is a display-only facilty but not for municipal securities. TRACE reports transactions in government and corporate bonds.

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is

The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks' average trading volume (30,000).

Which of the following would best describe working capital?

The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities. Working capital equals current assets minus current liabilities.

A violation of MSRB rules would occur if A) a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. B) a registered representative (RR) recommended geographic diversification to limit risk. C) an associated person held a joint account with a spouse. D) a representative made a recommendation to a customer after gathering information about the customer's financial status, tax status, investment objectives, and other holdings.

a MSRB rules limit gift-giving to a maximum of $100 per person per year in cash or value. The $250 is the amount a municipal finance professional can make as a political contribution to a candidate for whom the MFP is eligible to vote.

Your customer sold a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as

a $415 short-term capital gain. When options contracts expire, sellers or writers report a capital gain equal to the premium amount received; in this case, the amount is $415. Because options only have a nine-month life cycle, all capital gains and losses are short term.

Shortly before the end of the cooling-off period, the underwriters and representatives of the issuer have a meeting to review the status of the new issue. This is called

a due diligence meeting. The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.

All of the following disputes may be resolved using arbitration under the Code of Arbitration Procedure except A) member against another member. B) class action suits against a member. C) member against a person associated with a member. D) member against a public customer with consent of the customer.

class action suits against a member.; Class actions brought against member firms are not subject to arbitration under the Code of Arbitration Procedure.

Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following:

death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.

Regarding the sale of a new issue, a customer becomes a restricted person if he is A) a private investigator collecting information on one of the issuing firm's officers. B) a salesperson who works for a supplier of the issuing corporation. C) the grandfather of an associated person of a member firm. D) a salesperson who works for the issuing firm's underwriter.

working as a salesperson who works for the issuing firms underwriter. restricted persons include financial industry regulatory authority member firms and their associated persons, such as a salesperson working for an underwriter, plus immediate family members. immediate family members do not include ants and uncles or grandparents.

How are margin securities held (what name)

they are held in street name- the name of the brokerage firm

Hedges where the expiration dates are different are called __ spreads or __ spreads or __

time/calendar, horizontal

A "long" call spread is

where the long call premium is higher than the short call premium. buy high sell low = net debit (If premiums widen, a debit spread is profitable)

A "short" call spread is

where the long call premium is less than the short call premium. buy low sell high = net credit (If premiums narrow, a credit spread becomes profitable)

The subject of the FINRA rule 2330 is deferred variable annuities. It applies to the sale or exchange of this specific product. During a FINRA cycle examination of your firm, which of the following would raise a question as to the suitability of the activity?

A customer making two annuity exchanges under Section 1035 within a 36-month period Explanation FINRA Rule 2330 deals with suitability of deferred annuity contracts. One of the red flags is more than one exchange within a 36-month period. It is not necessarily a violation, but it does need an explanation. Changing subaccount allocations is not usually going to be a suitability case because there is no compensation to the registered representative. That generally means no conflict of interest. Waiting until age 60 means the customer understands that taking the withdrawal before age 59 would incur the 10% penalty. Taking out a home equity loan for a wedding (or similar expense) is not FINRA's concern. If the loan was taken out to purchase a deferred variable annuity, that would create a Rule 2330 problem for the firm.

Which items would change if a company buys equipment for cash? The working capital The total assets The total liabilities The shareholders' equity

A only The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets (less cash). However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.

A prospectus for a variable annuity contract must provide full and fair disclosure. is required by the Securities Act of 1933. must be filed with FINRA. must precede every sales presentation. A) II and IV B) III and IV C) I and III D) I and II

A variable annuity is a security and must be registered with the SEC, not FINRA. As part of the registration requirements, a prospectus must be filed and distributed to prospective investors. The time of distribution of the prospectus can be before the sales presentation or at the same time as the presentation. It is incorrect to state that it must precede every sales presentation.

A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar? A) Buy yen calls B) Buy yen puts C) Sell yen puts D) Sell yen calls

A) Buy yen calls Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises.

A new client would like to invest in an offering restricted to accredited investors. Any of the following could be used to verify accredited investor status except A) written confirmation from the client's CPA. B) a letter from a duly licensed life insurance agent. C) tax returns for the past two years. D) a bank account statement not more than three months old.

Although it is possible that the insurance agent has sufficient information, the regulators do not include them in the list of verifiable sources, such as the CPA or the client's attorney.

It is required that any informational changes to Form U4 must be made A) no later than 60 days after the member becomes aware of these changes. B) no later than 30 days after the member becomes aware of these changes. C) promptly after the member becomes aware of these changes. D) no later than 15 days after the member becomes aware of these changes.

Any changes to this information requires the filing of an amended form with the Central Registration Depository no later than 30 days after the member becomes aware of changes.

A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is

Any income to a U.S. investor is always subject to U.S. income tax. If foreign income tax is withheld in the country of origin, then that tax may be taken as a credit against the U.S. tax due. Tax Liability= US Income Tax - Foreign Income Tax

What documents are sent to the customer within 30 days of the account opening?

Arbitration agreement (not FINRA mandated to sign) Customer profile (Reviewed every 36 months) Within 30 days of signing an arbitration agreement as part of the account opening process the customer must be provided a separate stand alone copy of the predispute arbitration agreement. This prevents the I DIDN'T KNOW WHAT I WAS SIGNING EXCUSE.

Upon assignment, the seller of an exchange-listed equity call option must A) pay for the underlying stock within two business days. B) deliver the underlying stock within one business day. C) deliver the underlying stock within two business days. D) pay for the underlying stock within one business day.

Assignment of an equity call option requires the assigned party to deliver the underlying stock. This is treated the same as any other delivery or sale of stock. Regular way delivery is two business days after the trade date. In the case of assignment, the trade date is the assignment date. Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).

In a margin account, if a client purchases $15,000 of LMN preferred shares, $15,000 of money market mutual fund shares, and $2,500 of call options, what is the Regulation T call? A) $17,500 B) $25,000 C) $16,250 D) $32,500

B The amounts that must be deposited are as follows: $7,500 for the preferred shares, $15,000 for the mutual fund, and $2,500 for the options. Mutual fund shares cannot be hypothecated for 30 days, and option purchases are never marginable.

There are securities offerings that are limited to those who meet the definition of an accredited investor. The SEC requires that the issuer take reasonable steps to verify that purchasers of securities sold in those offerings are accredited investors. One way to verify accredited investor status for natural persons is to obtain a written confirmation from a person or entity stating that they have taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months. Confirmation from which of the following would meet the SEC's requirements? A) An investment adviser registered with the Administrator of the customer's state of residence B) A registered broker-dealer C) A licensed tax preparation service operating out of a retail location D) A parent of the investor

B In addition to a registered broker-dealer or an investment adviser registered with the SEC, acceptable confirmation of accredited investor status can be supplied by either of the following: (1) a licensed attorney who is in good standing under the laws of the jurisdictions in which the licensed attorney is admitted to practice law, or (2) a certified public accountant who is duly registered and in good standing under the laws of the place of the certified public accountant's residence or principal office.

For both U.S. Treasury notes and Ginnie Maes, A) interest is computed on an actual-day basis. B) quotes are as a percentage of par in 32nds. C) interest income is taxed at the federal level only. D) settlement is next business day.

B Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day, while Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual-day basis, and Ginnie Mae interest is computed on a 30-day month/360-day year basis. Both Ginnie Maes and T-notes are quoted in 32nds.

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. B) no tax is due. C) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old. D) ordinary income on the $5,000 difference between the purchase price and the current value.

B Investors in variable annuities are only taxed on the earnings of the account. This account lost money, so there were no earnings to be taxed.

One important respect in which the Roth 401(k) differs from the Roth IRA is that A) withdrawals from a Roth 401(k) are subject to tax on the earnings whereas all qualified withdrawals from a Roth IRA are tax-free. B) RMDs from the Roth 401(k) must begin at age 73 while there are no RMDs from the Roth IRA. C) it is only the Roth IRA that provides for catch-up contributions for those age 50 and older. D) contributions to the Roth 401(k) are made with pre-tax funds while those to the Roth IRA are from post-tax funds.

B It is only the Roth IRA where the participant never has RMDs. In both cases, contributions are with after-tax money and withdrawals are tax-free. Both have the catch-up provision, and it is $7,500 (for 2023) in the Roth 401(k) and $1,000 in the Roth IRA.

One of the specific concerns that the regulators have with variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. It would generally raise a red flag if the customer A) elects to make the exchange under the provisions of IRS Section 1035. B) has had another deferred variable annuity exchange within the preceding 36 months. C) has had another deferred annuity exchange within the preceding 36 months. D) has had another deferred variable annuity exchange within the preceding 60 months. Explanation

B FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035; no red flag would be raised there.

Before effecting an initial penny stock transaction for a new customer, the registered representative must confirm whether the person is an established customer. obtain a signed risk disclosure document from the customer. obtain a signed suitability statement from the customer. determine suitability based on financial condition, investment experience, and investment objectives. A) I and II B) II, III, and IV C) I and IV D) I, II, III, and IV Explanation

B According to the penny stock rules, registered representatives must provide risk disclosure information to all penny stock buyers, which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements. If an investor is not considered an established customer, they must sign a suitability statement, as well. In this case, we are told this is the initial trade by a new customer, so we are not going to confirm status as an established customer. LO 2.g

All of the following municipal bonds are callable at par. Which confirmation will show yield to call? A) 6.5%, 7% basis, maturing 2030 B) 5.5%, 5% basis, maturing 2030 C) 5.5%, at par, maturing 2034 D) 6.5%, 7% basis, maturing 2034

B Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two.

The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is A) prohibited because it doesn't reference an annuity. B) prohibited because it implies returns from mutual funds. C) permitted as long as there's no guarantee. D) permitted.

B) prohibited because it implies returns from mutual funds. Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as annuity.

Revenue bonds may be called for all of the following reasons except A) the facility has been destroyed. B) the issuer has reached a statutory debt limit. C) interest rates have fallen. D) a provision in a sinking fund agreement is calling for a partial call.

B) the issuer has reached a statutory debt limit. Statutory debt limits only apply to general obligation bonds.

One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past four months. Aligning with the short interest theory, you would tell her that this is A) an indication of predictable volatility in the stock. B) an indication of predictable stability in the stock. C) a bullish indicator. D) a bearish indicator.

C While short interest in a stock represents the number of shares sold short, the short interest theory considers rising short interest a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks.

A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except A) $45. B) $48. C) $35. D) $42.

C) $35. This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.

Advertising relating to municipal securities must be approved by which of the following? A) The Municipal Securities Rulemaking Board (MSRB) B) A designated supervisory analyst D) The Securities and Exchange Commission (SEC) Explanation

C) A general securities principal or municipal securities principal According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.

The predictions of the VIX Index reflect expected change over

next 30 days , The current VIX Index value quotes the expected annualized change in the S&P 500 Index over the upcoming 30 days, as computed from options-based theory and current options-market data.

Treasury STRIPS and Treasury receipts are quoted based on A) 0.125 (⅛ of a point in dollars). B) 0.03125 (1/32 of a point in dollars). C) amortization of premiums. D) yield to maturity.

D) yield to maturity. Explanation Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the number of shares to be sold. B) the public offering price. C) the names of the syndicate members. D) the net proceeds to the issuer.

D) the net proceeds to the issuer. Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

What four pieces of information is absolutely necessary to open a new account?

Customers name Address SSN or Tax ID Date of Birth

One of your customers has become nervous about current stock market conditions and calls to discuss the matter with you. Which of the following would not meet Regulation BI's definition of a recommendation? A) You need to reallocate some of the equity portion of the portfolio to cash. B) This is not the time to sell. Hold what you have. C) Liquidate some of the losers for the tax benefit. D) Our top analysts tell us that the market is about to strengthen.

D Nothing in the statement about the analysts is telling the customer the steps to take. Regulation BI uses the phrase "a call to action" to describe the essence of a recommendation and there is no "call" in that statement. The firm or associated person must use language explicitly suggesting that the customer follow a certain behavior for it to be a recommendation. Regardless of the reason, telling a customer to sell specifically identified stock is a recommendation. Reallocating a portfolio means selling some assets and buying others. Although we tend to think of recommendations as a buy or a sell, Regulation BI points out that an explicit recommendation to hold a security (or securities) is a recommendation.

A registered representative received an email from a new customer, a retired small business owner with whom the representative has not yet held detailed financial discussions. The client wants to know why the IRS now expects her to pay income tax on her entire retirement distribution, since up until now she only had to pay tax on part of it. Also, why is she paying tax at all, when she was told repeatedly, back when she started the plan, that it featured tax-deferred growth? Which of the following might you tell this customer? A) Up until now, she paid tax only on the cost-base portion of her distribution. B) The IRS is trying to make up for taxes unpaid in the past. C) If she had a qualified plan, she wouldn't be paying tax on anything by now. D) She appears to have a nonqualified plan and outlived her life expectancy.

D Aside from confusing tax-deferred and tax-free, it appears this client finally withdrew her full cost base. The entire amount of the distributions is now taxable. Prior to this, it was the growth and earning she was paying tax on, not the cost base. If the plan were qualified, she would be taxed on her entire distribution from the beginning, since the contributions would be made pretax and the growth and earning were tax-deferred.

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit

D) $1,800. Explanation If the first trade in a long margin account is less than $2,000, the customer must deposit 100% of the purchase price. It is a FINRA rule that every margin transaction must result in an equity in the account of at least $2,000, except that payment in full for any security purchased (under 2K total) will satisfy the requirement. LO 16.d

If a customer sells short 100 XYZ at 79 and simultaneously writes 1 XYZ Jan 80 put at 5, the maximum gain potential is A) $500. B) $600. C) unlimited. D) $400.

D) $400. Explanation Short stock combined with a short put is an income strategy that carries unlimited loss potential. Although gain will occur if the stock moves downward, the customer wrote an in-the-money put that will be exercised, forcing the customer to buy stock at $80 for a $100 loss on the stock shorted at $79. However, the customer received $500 in premiums, resulting in an overall gain of $400. Breakeven for short stock-short put is the short sale price plus the premium. In this case, breakeven is 84, and maximum gain is four points—from 84 to 80.

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. B) Any gain or loss is deferred until he liquidates the AC Income Fund. C) It is a tax-free exchange. D) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase.

D) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund.

An arrangement in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor is known as A) a stop-loss account. B) a power-of-attorney account. C) a nonapproval account. D) a discretionary account.

D) a discretionary account. Explanation Discretionary accounts are arrangements in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor.

Municipal bonds—known as dollar bonds—are generally quoted A) yield to call. B) yield to maturity. C) net yield. D) as a percentage of par.

D) as a percentage of par. Explanation Although municipal bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being made in dollars. Remember that a percentage of par value ($1,000) equals a dollar price.

SEC rules require that customers be given a copy of the risk disclosure document before their first transaction in a penny stock. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least A) five business days after sending the statement before executing the first trade. B) five business days after receiving the statement before executing the first trade. C) two business days after receiving the statement before executing the first trade. D) two business days after sending the statement before executing the first trade.

D, It is SEC Rule 15g-2 that requires the firm wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer. One of the defining characteristics of penny stocks is that they are less than $5 per share. While the other features listed are characteristics of penny stocks (the stock is not listed on any major exchange. The stock is thinly traded. The stock is an OTC security), the stock price is decisive.

What are the disclosures that must be given to a day trader (Any engaging in a pattern of trading with 4 or more day trades in a 5 business day period)

Day trading can be extremely risky Be wary of exaggerated claims about the potential profits of day trading Day trading requires knowledge of the securities markets and the firms operations Day trading will generate substantial commissions to the firm promotion the strategy Day trading on margin can result in losses greater than one's investment Person who day trade for other must be registered as an Investment Adviser or a Broker Dealer

All of the following are characteristics associated with equity-linked notes (ELNs) except A) they can be exchange traded or traded over-the-counter (OTC). B) they are considered to be nonconventional structured investments. C) they are equity securities. D) they have final payments at maturity linked to the return of an underlying stock or basket of stocks.

Despite their name, ELNs are debt instruments, not equity instruments. They have a partial fixed return, as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded, while others trade OTC. FINRA, who considers ELNs to be nonconventional structured investments, has expressed concerns that investors might not fully understand ELNs or the risks associated with them.

For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 73, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as a required beginning date (RBD). a required minimum distribution (RMD). lockup provisions. vesting. A) III and IV B) II and IV C) I and II D) II and III

Explanation For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 73. This is known as the RBD. The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the RMD.

A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in A) December. B) April. C) July. D) January.

January. Explanation Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.

Marketwide circuit breaker rules are designed to A) protect against rapid, uncontrolled drops in the market.

Marketwide circuit breaker rules protect against rapid, uncontrolled drops in the market. A marketwide trading halt will be triggered if the S&P 500 index declines in price by specified percentages from the prior day's closing price of that index. Those triggers are currently set at three circuit breaker thresholds: 7%, 13%, and 20%.

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above

Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 ($13,000 ÷ 1.3 = $10,000).

When investing in a direct participation program (DPP), an investor should know that some asset types cannot be depreciated or depleted. One example of such an asset would be A) buildings. B) oil. C) crops D) gas.

Natural resources like oil and gas can be depleted and buildings are a depreciable asset, but farm crops are considered to be renewable assets. Another real estate asset that cannot be depleted or depreciated is raw land.

What is the time limit for signing an options agreement with the CBOE

No later than 15 days after the account is opened

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. B) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. C) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. D) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call.

Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH).

Of the following callable bonds, which confirmation must show yield to call?

On a premium bond, the yield to call will be lower than the yield to maturity. (blondie CL Me) ON a discount bond, the YTM will be lower than the YTC (discount MLC)

Which of the following securities can generate phantom income? A) U.S. Treasury notes B) Common stock C) Treasury Inflation-Protected Securities (TIPS) D) GNMA pass-through certificates Explanation

One of the key features of a TIPS bond is that each six months, the principal value is adjusted by the inflation rate. When that adjustment is an increase, it is considered income and is taxed as such in that year. It is phantom income because the investor does not receive the added amount until maturity. LO 6.c

Which of the following mortgage-backed securities would provide investors with the most predictable maturity date? A) Planned amortization classes (PACs) B) Targeted amortization classes (TACs) C) Ginnie Maes D) Fannie Maes

PACs are planned amortization class collateralized mortgage obligations and have established maturity dates. Prepayment risk is transferred to the PAC companion—or support—class bonds.

Which of the following statements regarding SMA balances is true? A) SMA balances, which are considered a line of credit, may only be used to purchase additional securities. B) SMA balances may be withdrawn without restriction regardless of the account status being below or brought below minimum maintenance by the withdrawal. C) SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance. D) SMA balances are free credit balances available to be withdrawn upon demand.

SMA is a line of credit that may always be withdrawn (even in a restricted account), provided the withdrawal does not bring the account below minimum maintenance.

A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as A) a special situation fund.

Special situation funds buy securities of companies that are considered to be in a position to benefit from special, nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.

A broker-dealer has chosen to close out a customer's position in a cash account rather than request an extension for payment. The account will now be frozen for A) 90 days. B) 30 days. C) 20 days. D) 120 days. Explanation

When a broker-dealer chooses to close out a customer's position rather than request an extension for payment, the customer's account will be frozen for 90 days.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% tax deferred. B) 100% taxable. C) partially a tax-free return of capital and partially taxable. D) 100% tax free.

The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

What is the breakeven point for a person who bought 500 shares of JKL stock at $71.25 and sold 5 JKL July 75 calls at 3.75?

The breakeven point is the stock price purchased minus the premium ($71.25 - $3.75 = $67.50). One of the drawbacks of writing calls against a long stock position is that it limits upside potential. Therefore, covered call writing is typically done in a stable market.

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form?

When transferring a customer's positions to another broker-dealer via the TIF under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer the positions to the receiving broker-dealer after validation.

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative should know that

The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.

Which of the following statements regarding the Federal Farm Credit System securities are not true? A) They issue short-term notes and long-term bonds. B) They are direct obligations of the U.S. government. C) Interest is tax exempt at the state and local levels. D) The proceeds are used to make loans to farmers.

With the exception of Ginnie Mae, all agency securities are indirect obligations of the U.S. government.

One of your clients is an executive with a corporation that provides a qualified defined benefit pension plan. In addition, the client maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed?

The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.

Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal? A) She will not be able to achieve diversification this way. B) She will not be able to switch between different funds within each family. C) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. D) She should consider Class B shares only if investing a large sum to avoid paying the sales charge up front.

The larger the investment amount, the greater the breakpoint sales charge discount on Class A shares would likely be at a single fund company. While Class A shares are appropriate for larger investments because of breakpoint discounts, Class B (back-end load) shares, which offer no breakpoint discounts, are not. Therefore, the most important disclosure would be to explain that the advantage of breakpoint discounts on Class A shares could be lessened or lost if the investment is divided among so many different fund families. Diversification can occur within one fund family or across many, and moving funds from one fund to another within a single fund family is still possible.

Acme Pharmaceuticals previously had issued $200 million of common stock in an IPO. A year later, it issued $50 million of debentures at par value. Acme's leverage is what percentage of its total capital? A) 400% B) 25% C) 50% D) 20%

The leverage is the extent to which borrowed funds make up the company's total capital. Total capital is the value of the equity and debt financing combined. Acme has issued $50 million of debentures (debt capital) and $200 million of equity capital (the common stock). That makes the total capitalization of Acme equal to $250 million. The leverage is $50 million divided by $250 million, or 20%. An analyst would consider this conservative leverage.

In a new margin account, a customer buys 100 XYZ at 62 and simultaneously writes 1 XYZ Jan 65 call at 2. The margin call will be for

There is no margin requirement on the short call, as it is covered by the long stock. The requirement for $6,200 of stock is $3,100, but the call will be for $2,900 because the 2-point premium received when the call was written will be applied first.

Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund, A) the dividends are taxable in the year received.

Unlike dividends from a municipal bond fund or UIT, which are exempt from federal income tax, dividends from stock funds (or taxable bond funds) are taxable in the year paid, regardless of whether they are reinvested or taken in cash. The exam wants you to know that there is no tax advantage to reinvesting distributions. There are other benefits, such as reinvestment at NAV instead of POP, but tax breaks is not one of them. As it happens, when dividends are reinvested, the investor's tax basis increases by the amount of the dividend.

Describe a fee based account

an account that imposes a flat annual fee for all trade executions rather than a per trade commission charge

When must the margin agreement be signed by the customer

at or prior to the settlement of the first trade in the account

What are 4 essential facts covered under FINRA RULE 2090

effectively service the customer's account act in accordance with any special handling instructions for the account understand the authority of each person acting on behalf of the customer and comply with applicable laws regulations and rules

When auction rate securities (ARS) reset the yield to be paid in the upcoming period, the process used is a stop loss system. is a Dutch auction. establishes a clearing rate. guarantees that every bidder will have their order filled.

is a Dutch auction. establishes a clearing rate. The process used to reset the interest rate each period for ARS is called a Dutch auction, which is the lowest bid rate at which all of the bonds can be reset—or sold for new issues—at par. This newly established rate is known as the clearing rate, and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established clearing rate will have their orders go unfilled.

An investor buys a GO bond in the secondary market with a coupon of 3½% that has a basis of 3¾%. If the bond is held until maturity, the investor's actual yield will be A) 3¾%. B) 3½%. C) more than 3¾% . D) more than 3½% but less than 3¾%.

more than 3½% but less than 3¾%. With a coupon of 3½% and a basis (yield to maturity) of 3¾%, we know the bond was purchased at a discount. GO bonds are municipal bonds, and when a municipal bond is purchased in the secondary market at a discount, the accretion of the discount is taxed as ordinary income. Therefore, a portion of the investor's return will be taxable, making the actual return slightly less than the yield to maturity.

An investor purchased a zero-coupon corporate bond on the initial offering. The price was 50. The bond's maturity date is in 10 years. At maturity, this investor will have A) no taxable income and a $500 long-term capital gain. B) a combination of taxable income and capital gain based on IRS tables. C) no taxable capital gain. D) $500 in taxable income and no capital gain.

no taxable capital gain., On a corporate zero-coupon bond, investors must accrete the interest on an annual basis. Investors receive a Form 1099-OID indicating the amount of taxable accretion earned for the year. This is known as phantom income because it is taxed but not received. This phantom income is one of the reasons why these bonds are favored for tax-sheltered accounts, such as IRAs. Because all the interest has been accreted, when the bond matures, there is no capital gain or loss.

Hedges where the strike prices are different are called __ spreads or __ spreads

price, vertical

Joe Johnson is a founding partner of Ground Break Realty. The company was impacted negatively by rising interest rates and falling property values. There was concern that the firm needed an injection of liquidity to prevent failure, and Johnson lent the company funds to forestall bankruptcy. If the company goes bankrupt, Johnson will A) receive his loaned money first over any other investor because he is a founder of the company. B) receive his money after the secured creditors but before the holders of standard debentures. C) not receive any money back because he is an owner of the company, and the loaned money is considered equity (the money represents an equity interest in the company). D) receive his loaned money before any of the equity investors in the company.

receive his loaned money before any of the equity investors in the company. It is not uncommon for founders of companies to lend money to the business to keep the company going. However, this is typically subordinated debt. Subordinated debt has priority over equity investors but goes behind all other creditors including unsecured debt such as debentures.

options premiums are

short term capital gains (if selling) / losses (if buying)